Trinova Corp. v. Michigan Department of Treasury

1991-02-19

Headline: Michigan’s value‑added business tax upheld: Court affirms three‑factor apportionment, allowing Michigan to tax a fair share of a multistate manufacturer’s activity based on payroll, property, and sales.

Holding: The Court held that Michigan’s single business value‑added tax, using the three‑factor payroll–property–sales formula, does not violate the Due Process or Commerce Clauses as applied to the Ohio auto‑parts manufacturer, affirming the Michigan courts' judgment.

Real World Impact:

Allows states to use three‑factor apportionment on value‑added taxes.
Makes it harder for firms with big in‑state sales but little payroll to avoid state tax.
Leaves Michigan’s alternative gross‑receipts method as a liability cap.

Topics: state business taxes, value‑added tax, tax apportionment, multistate corporations

Summary

Background

An Ohio auto‑parts manufacturer with a small Michigan presence but large Michigan sales challenged Michigan’s Single Business Tax (SBT), a value‑added tax enacted in 1976. The SBT measures value added by the addition method and apportions taxable activity to Michigan using an average of three ratios: Michigan payroll, Michigan property, and Michigan sales. For 1980 the company had about $104 million in Michigan sales (26.5892% of total) but only a handful of Michigan employees and little Michigan property; the company paid $293,578 under Michigan’s calculation and sued for a refund after seeking alternative apportionments in state court.

Reasoning

The Court asked whether applying the three‑factor formula to a VAT violates the Due Process or Commerce Clauses. It concluded that value added cannot be located with exact geographic precision, that the addition and subtraction methods reach the same result, and that the three‑factor payroll–property–sales formula is a broadly accepted, reasonable way to apportion a unitary business. The company bore the burden to prove by “clear and cogent evidence” that the apportionment produced a grossly distorted result; the Court found Trinova did not meet that burden and that the tax was neither unfairly apportioned nor discriminatory in application.

Real world impact

The decision affirms that states may use the familiar three‑factor apportionment when taxing a value‑added base and rejects the company’s proposed exclusion of the sales factor. The ruling applies to the tax year and facts before the Court; other taxpayers with different facts might still prevail. Michigan’s statute also contains an alternative gross‑receipts method and statutory limits on relief.

Dissents or concurrances

Justice Scalia concurred in the judgment, noting he would rest on facial non‑discrimination. Justice Stevens (joined by Justice Blackmun) dissented, saying payroll and depreciation are geographically assignable and that Michigan’s formula improperly taxes extraterritorial activity.